Investors can respond to the Fed’s actions. The U.S. Federal Reserve raised interest rates once again in September, and telegraphed its intentions to boost them at its meeting in December. Coupled with other factors, including…
Investors can respond to the Fed’s actions.
The U.S. Federal Reserve raised interest rates once again in September, and telegraphed its intentions to boost them at its meeting in December. Coupled with other factors, including the prospects of inflation, this rate trend has sparked uncertainty about the lengthy bull market for stocks. While rising rates create pressures in some corners of the market, they create opportunities in others. For investors looking to either protect themselves from the fallout of rising rates or perhaps to even profit from the Fed’s strategy, here are nine unique exchange-traded funds that offer strategies tailor-made for the current environment.
Vanguard Short-Term Corporate Bond ETF (ticker: VCSH)
There’s an inverse relationship between bond yields and bond prices — when yields go up, the value of bonds goes down. But that loss is realized only when a bond is sold. An investor who holds it to maturity gets the interest payments and won’t have to worry about any principal value declines. Short-term funds like VCSH see many bonds reach full maturity. This Vanguard fund manages a modest yield of 3.6 percent without taking on too much additional risk thanks to a focus on quality corporate debt. Top holdings include debt from Anheuser-Bush InBev (BUD), CVS Health Corp. (CVS) and other world-class corporations that are very stable.
Invesco LadderRite 0-5 Year Corporate Bond Portfolio (LDRI)
Another strategy for low-risk investors who prefer bonds is to “ladder” their bond holdings — that is, stagger maturities so different bonds roll off at different times. LDRI can take on slightly longer-term bonds since it rolls off only a portion of the portfolio at a time and then acquires new holdings. Not only is this a great way to smooth out risk by entering into new bond holdings at various times, but there will be always be a buying opportunity in the near future. Laddering individual bonds in your personal portfolio can be complicated, but this ETF takes out the guesswork — and offers a 3.5 percent yield to boot.
Much like variable interest rate mortgages or credit card plans, the bonds in this fund aren’t fixed in their terms and will yield more as rates rise. Keep in mind, however, the U.S. is still at historically low levels compared with the past few decades. Unfortunately that means even after recent rate hikes this fund yields about 2.6 percent at present. However, that’s up from about 2 percent a year ago — and could march steadily higher if rates keep climbing. And with the bonds of this fund coming from top stocks like Goldman Sachs Group (GS) and Morgan Stanley (MS), the holdings of this bond fund are very low risk.
A big reason rates rise in the first place is because the Federal Reserve is looking to fight inflation. In this environment, the Treasury’s inflation-protected securities, or TIPS, may be a wise bet. These bonds may not offer tremendous yield on their face, but are granted an increase in principal value based on the rate of inflation — so you can be sure your nest egg will never lose ground simply because prices have moved higher too fast. Keep in mind if inflation prospects dive, so will your returns in TIPS. That makes this very much an insurance play amid rising rates more than a way to chase profits.
This ProShares fund is a more tactical way to play TIPS. It includes derivatives to hedge against being on the wrong side when interest rates drop. It’s a dynamic approach. The fund takes a look at the last 30 years of inflation data and looks to deliver a return to offset the erosion of buying power that happens thanks to the natural pressures of inflation over time. It must be noted, however, that this fund is simply designed as an offset — which, sadly, means you may not net much total growth. But as a defensive play against inflation and rising rates, RINF is spot-on.
Another play on inflation pressures and rising rates is the aptly-tickered RISE fund. This fund uses derivatives to bet against long-term Treasury bonds — so if rates continue to rise and these assets lose value, RISE makes money. That’s a powerful way to profit when the overall bond market is challenging thanks to rising rates. But remember this ETF will decline when the environment becomes more favorable for bonds. While many expect rates to rise and bonds to fall, it is difficult to predict when the market will change direction. That means this is not a fund to hold forever, but it may be a good short-term bet for the current course.
Another quirky ETF is this curated fund of stocks that ProShares managers expect to profit most from rising interest rates. That means stocks in the financial sector, since they generally command higher interest rates on loans and other transactions, but that segment of the market only represents about a third of the entire portfolio. The rest include interesting stocks like Exxon Mobil (XOM) and railroad CSX Corp. (CSX) that have historically done well in a rising-rate environment, too. It’s a strategy that may be worth a shot — particularly as so many stocks that have been past favorites are having a rough time on Wall Street these days.
Many investors are interested in growth-oriented holdings and prefer stocks as a way to make their nest egg grow faster. That means being strategic in a rising-rate environment. One subsector to consider now is insurance. These companies fall under the broader category of financial stocks, but are much less risk since they get regular premium payments from customers. Also, insurance companies can invest the money they don’t need immediately for claims. The same reasons that make shorter maturity bond funds attractive benefit insurance stocks — all while still giving investors the upside that comes with stocks like Prudential Financial (PRU) and Travelers Companies (TRV).
Another targeted play on the financial sector is this banking ETF that avoids the larger names in high finance. Instead, KRE consists of local and regional players that do most of their lending to smaller businesses and families buying homes. This is not just a lower-risk business model, but also tightly tied to interest rates. There is more volatility in these smaller financial stocks, since they can be susceptible to local trends. But KRE is a great way to tap into the true potential of financial stocks.